Singapore’s trading enhancements are only the first steps

The Monetary Authority of Singapore and Singapore Exchange have proposed improvements to the local equity trading environment, aiming to improve the country’s equity trading business.

The Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX) have proposed improvements to the local equity trading environment, aiming to improve the country’s equity trading business. Nevertheless, there remains a long way to go for Singapore to become as active an equities market as its counterparts in North Asia.

The regulator and exchange have released a joint consultation paper that aims to strengthen trading within the securities market. The market regards these proposals as a catch-up exercise in order to keep pace with other developed markets,  that keep Singapore in line with obligations and guidelines from the G-20 / International Organisation of Securities Commissions. 

Muthukrishnan Ramaswami, the president of SGX, told The TRADE Asia last autumn that equities would be SGX’s next push and it was planning on making the same level of technological investment into equities as it has done with derivatives.

Magnus Bocker, the chief executive officer of SGX, said that this joint consultation and the proposed improvements to Singapore’s regulatory tools were “crucial to a well-functioning securities market.” He added that Singapore’s securities market had to be strengthened in order to meet the expectations of investors and companies.

The new suggestions appear to have met with acceptance from the market. However, even with the proposed new rules, some observers believe there remains significantly more to do to bring Singapore’s equity markets up to the level of Hong Kong, because regardless of enhanced market procedures and connectivity, the capital requirements of doing business in Singapore still remain high.

“They are still running essentially a closed shop on the broking front. The costs of setting up as a capital markets services (CMS) broker-dealer are so far out of step with any other international market that no-one really tries,” said Philippa Allen, CEO of ComplianceAsia, an Asia-based firm that provides outsourced compliance functions for fund managers.

In Singapore, there is a minimum base capital requirement of S$1,000,000 for a non-member, (a non-member being a firm which can only trade).  Full clearing membership in Singapore requires a base capital of S$5,000,000. That compares to Hong Kong where the cost is HK$5,000,000.

However, everyone is deemed to be equivalent to an exchange member for liquid capital calculations, even if only conducting agency execution, with clearers shouldering the risks. That can be a challenge if a firm is only an agency execution broker. Group shareholder funds of S$200 million are required and if a firm falls short, it needs a bank guarantee issued to the MAS from a Singapore bank, in an amount pre-set by the MAS, usually between S$5 to S$10 million. Such guarantees used to be readily available from banks based on receivables, but post-2008 the local banks now only offer them against existing deposits.  

“A firm could be looking at up to S$15 million to get up and running,” explained Allen. “In a world where most regulators are trying to reduce the number of firms that are ‘too big to fail’, Singapore is effectively pushing out small specialist broker-dealers, exactly the sort of firms that hedge funds, (which the MAS is trying to attract to Singapore), want to deal with and hobbling the plans for the SGX to attract more business.”

For the changes currently being proposed, the MAS/SGX review found three broad areas where improvement could be made: the promotion of orderly trading and responsible investing; improving the transparency of market intervention measures; and strengthening the process for admitting new listings plus enforcement against listing rule breaches.

To encourage trading to be conducted on a more orderly basis, the regulator and exchange are considering setting a minimum trading price for issuers listed on the SGX Mainboard. They consider low priced securities to be linked to potentially high volatility and becoming the target of speculation and market manipulation.

MAS and SGX said that they wanted to reduce credit risk exposures of market participants and have proposed that securities intermediaries impose minimum collateral on their customers for trading in both SGX- and foreign-listed securities, based on their open positions and credit risk management practices. SGX also said it plans to shorten the settlement cycle from T+3 to T+2 days by 2016.

To improve transparency in short selling, MAS and SGX proposed short position reporting rule involving aggregate position reporting and disclosure of significant individual short positions. SGX said that this will add to an arrangement introduced in 2013, where participants were required to mark short sell orders. MAS and SGX also proposed that trading restrictions imposed by securities intermediaries for securities listed on SGX should be announced through the SGX website.